Taxation Law - Mary Jackon - Scott - Assessment Answer

Taxation Law Assignment

Assignment Task

Introduction

Question 1

In Australia, there are taxes that are subject to the benefits that are offered by employers to employees. In this case, the Mary Jackson is offered benefits by her employer, Elite Retail. Elite Retail is subject for $4,000 expense payment fringe benefit for the amount used to transfer Mary Jackson’s furniture to Brisbane. The provision of $5,000 entertainment allowance for Mary Jackson to entertain her clients is subject to fringe benefit tax exemptions. However, there is need to classify the tax under its various categories.

A laptop valued at $2,400 and a mobile phone valued $800

In Australia, numerous employees’ benefits are exempt from any tax or fringe benefit tax (Australian Taxation Office, 2016). Particularly, the work related items are exempted from any Fringe Benefit Tax (FBT). As a result, electronic devices or portable devices, such as, Mobile Phones and laptop’s are exempt from any tax, and this, is irrespective of whether they have a lot of similar functions. Hence, the purchase of laptop valued at $2,400 and a mobile phone valued $800 have no tax consequences on either Mary Jackson or Elite Retail. These items are exempt from tax, or have no tax consequences because they are primarily used in the employee’s employment (Nethercott, Richardson and Devos, 2011).

Home Telephone Bill worth $330 of which 50% is work related.

In this case, the employer, Elite Retail, is subject to 50% of Mary Jackson’s work related fringe benefit tax amount. Hence, Elite Retail is subject to $165 (50% of $330) of the home telephone bill, as the employee, Mary Jackson, is on-call about 50% (half) of the time. The rest, a half, is not subject to fringe benefit tax, as the phone bill does not result in a work related activity, it is for private and personal use (Woellner, 2013).

A company car Mazda 3, and on the road cost of the car is $30,000.

Mary Jackson’s private use of the motor vehicle is exempt from the fringe benefit tax, as it meets the following conditions:

• It is used for travel between work and home (Woellner, 2013).
• Her travel is incidental to travel in the course of work related duties.
• Her non-work related use for the Mazda 3 is minimal, irregular, and infrequent (Australian Taxation Office, 2016).

As Elite Retail offers an on the road cost of $30,000, an employee’s expenditure, the company is eligible for expense payment fringe benefit tax of a similar amount, FBTAA s. 53 (Akhtar, 2014).

$1,500 allowance to cover professional subscriptions

The Company, Elite Retail, is subject to $1,500 fringe benefit tax for Jackson’s professional subscriptions, as it relates to her profession or work.

A low interest loan of $500,000 at 4%. This was used to finance her property at Brisbane.

The Elite Retail provision for the loan is considered as the loan fringe benefit, as it has provided the loan with a low interest rate of 4%, which is low than the required benchmark of 5.95% FBTAA Div. 4 (Woellner et al., 2016).

Question 2

In Scott’s case, Buildings and land are classified under separate Capital Gains Tax (CGT) assets. This is because Scott bought land in 1^stOctober 1980, which is considered pre-CGT; however, the building was built on the land on 1^stSeptember 1986, a post-CGT period: s. 108-55 (2) ITAA. In this case, there is a disposal of a Capital Gains Tax (CGT) asset, and the CGT event A1 happens: s 104-10(1) ITAA (Nethercott, Richardson and Devos, 2011).

Capital proceeds apportionment

The capital proceeds have to be apportioned to the building asset of the disposal: ITAA s. 116-40. Thus, the apportionment of the capital proceeds is as follows:

The value of land (1^stSeptember 1986) $90,000 (60%)

The Value of building (cost of construction) $60,000 (40%)

$150,000 100%

Calculating Capital Gains Tax

The Capital Gains Tax (CGT) can be determined under the discount method and the indexation method, as the land (CGT Asset) was bought before September 1999, and Scott has been held for over a year (Australian Taxation Office, 2016).

Discount method

Capital proceeds: $320,000

Less: the cost base for the building $60,000

$260,000

Thus, the Capital gains = $260,000 × (50% discount).

$260, 000 × 50/100 = $130,000

Capital Gain = $130,000

Indexation Method

The capital proceeds is $320,000

The indexed cost base for the building $60,000 × indexation factor

$60,000 × CPI September 1999/September 1986

$60,000 × 68.7 (CPI September 1999)/43.2 (Sept 1986).

$60,000 ×1.590

= $95,400

The Capital Gains = Capital Proceeds – Indexed cost base

= $320,000 - $95,400

= $224,600

Thus, the Discount method produces a lower CGT gain than the indexation method. As a result, Scott would choose the discount method, as it causes a lower CGT.

(b) If Scott sold his property to his daughter for $200,000, the market value substitution rule, under ITAA s. 116-30 (2) would come into effect (Sadiq et al., 2016). The market value substitution rule will be applied because the capital proceeds from the sale of the property are lower than its market value, and also, the parties failed to deal with each other at ‘arms length’. Arm’s length activities or transactions are those whereby the buyer and seller act independently without any undue pressure or duress, and have no blood relationship (marriage, blood, or unrelated dealings) with each other (Australian Taxation Office, 2016). This ensures that the parties to the transactions deal with each other in their self-interest, and have equal bargaining positions. Two people who have an equal bargaining knowledge and power of the property under transaction are more likely to agree on the price, which is close, or it is the market value, as the buyer will strive to bargain the price and reduce it to the lowest possible price, while the seller would want to obtain the highest possible price. It is believed that arm’s length transaction will be equitable and fair to all the parties to the transaction, and thus, result in a fair market price (Akhtar, 2014).

If Scott sold his property to his daughter, the computation of capital gain in (a) above, would not change, as the proceeds from the sale of the property was already founded on the market value, which is the value of the property at auction (Australian Taxation Office, 2016).

(c) Under ITAA Subdiv 115-A, if the owner of the asset under transaction is a company and not a person, the discount method is not available for use (Nethercott, Richardson and Devos, 2011).